Economists predict more market jitters

The World Today - Thursday, 1 March , 2007 12:26:00

Reporter: Peter Ryan

ELIZABETH JACKSON: Investors are making a cautious return to the Australian share market which has staged a mild recovery after yesterday's correction rattled global markets.

The key market indicator, the All Ordinaries index opened a quarter of one percent higher, shadowing Wall Street where soothing words from the chief of the US Federal Reserve calmed edgy traders.

But local investors were treading carefully, buying safe blue-chip stocks such as banks and resources - after yesterday's sell off wiped $34 billion off the share market.

Economists though are warning against complacency and say there are more tremors to come.

More from our Business Editor Peter Ryan.

(Sounds of Wall Street closing bell)

PETER RYAN: As the closing bell sounded on Wall Street, the anxiety wrought by yesterday's global sell off had eased, but only slightly.

Both the Dow Jones Industrial Average and the S&P 500 closed around half a per cent stronger, as bargain hunters bought into safe blue chip stocks.

Traders are still monitoring their heart rates, but are reluctant to admit the bull market is looking slightly bearish at the moment.

VOXPOP: If I didn't have the confidence, if I hadn't seen it bounce back so many times before, I'd feel a little bit different, but I'm absolutely confident.

VOX POP 2: I'm just hoping that this is short-lived; it's a short correction and it'll be back to swinging in high flying days again.

PETER RYAN: Share markets in Europe didn't fare so well ending in the red, and London's main indicator shed 1.8 per cent.

But that was before some calming comments from the chairman of the US Federal Reserve Ben Bernanke who was testifying before a congressional budget committee in Washington.

BEN BERNANKE: There didn't seem to be any single trigger of the market correction we saw yesterday.

PETER RYAN: And despite some worse than expected economic growth figures for the final three months of last year, the world's most powerful central banker hosed down concerns about the outlook for the US economy.

BEN BERNANKE: My view is that taking all the new data into account, that there is really no material change in our expectations for the US economy since I last reported to Congress.

PETER RYAN: Those calming words from Ben Bernanke helped stabilise Wall Street, helping the Australian market edge higher throughout the morning, with investors snapping up safe stocks like banks and resources.

CRAIG JAMES: It's a modest increase and really that's the best that we could hope for.

PETER RYAN: Commsec's chief economist Craig James says investors have had a reality check, avoiding anything that poses a risk.

CRAIG JAMES: Certainly investors are on the lookout for bargains but it's also the case for minimising the risks and the sharp fall in global share markets highlights the fact that you just can't have blue sky expectations.

PETER RYAN: As the dust settles on the correction, economists are looking at the cocktail of causes beyond the nine per cent dive in Shanghai.

ROBERT PARKER: Whenever you have a market correction and I would emphasise this is a market correction, it's not the start of a long-term bear trend, but whenever you have a market correction, you have a confluence of factors.

PETER RYAN: Robert Parker of Credit Suisse Asset Management says while the plunge in China was the spark, it wasn't the inferno.

ROBERT PARKER: We've had the correction in the Chinese market which has been worrying us for a month now, you've had a statement by Greenspan, rightly or wrongly where he has been saying, perhaps the American economy will go into recession next year.

You had poor durable goods numbers and I think in addition, we've had a situation where investors were taking substantial risks as at a week ago.

STEPHEN ROACH: My fear is that a lot of people around the world and in the markets have completely dropped their guard, and of course that's the time when markets are most vulnerable to a correction.

PETER RYAN: A well known market bear, Stephen Roach says the correction was long overdue, and believes despite the shock, investors are still too relaxed.

STEPHEN ROACH: The level of complacency that exists right now in our markets, amongst investors and then policy makers, politicians, and some of the global managers of our international financial architecture like the IMF and G7, complacency on all those counts is very extreme.

I think the dramatic compression of spreads on risky assets like high yield corporate debt and emerging market debt are indicative again of another manifestation of this complacency and I think complacency is a breeding ground for risk and volatility and investors need to be wary of that.

PETER RYAN: Meanwhile, authorities in Wall Street are investigating a computer glitch that traders say catapulted yesterday's tremors into a major sell off.

But whatever the outcome, the reality is that traders will be treading carefully and monitoring their heart rates for any volatility - real or perceived - in the weeks and months ahead.